Bank of Canada expected to hold rates as uncertainties weigh

OTTAWA, March 6 (Reuters) – The Bank of Canada was widely expected to hold rates steady at its meeting on Wednesday, with the majority of analysts anticipating one more hike in 2019 even as recent data has clouded the outlook and could force a more dovish tone.

Canadian economic growth slowed to a trickle in the fourth quarter of 2018, falling well below the expectations of both the central bank and analysts, data released on Friday showed.

That may force a response from the Bank of Canada, but analysts expect no major policy changes at the Wednesday meeting, which will not include the publication of a new economic forecast.

“I think they’re going to water down the hawkish bias they’ve had lately, but maybe not abandon it yet,” said Royce Mendes, a senior economist at CIBC Capital Markets.

“That could come in April,” he added, when the central bank will release its next quarterly economic forecast.

The Bank of Canada has raised rates five times since July 2017, though it has held its overnight interest rate steady at 1.75 percent since October of last year amid low oil prices and a weak housing market.

Last month, Governor Stephen Poloz said interest rates still need to move up into the neutral range, pegged at between 2.5 percent and 3.5 percent, but he warned that the path back was “highly uncertain.”

Indeed, the central bank’s neutral rate range has become contentious, with bond investors warning that it may be too high for Canada’s debt-laden economy, hurting its use as a signpost for monetary policy.

“We’re far closer to the end of this rate hiking cycle (than the bank’s estimate of the neutral rate suggests),” said Mendes.

A Reuters poll last week found that most economists expect one more hike in 2019, though not until the third quarter, with a further hike expected in 2020. The same poll found a small, but not insignificant, chance of a cut this year.

Canada’s overnight index swaps market, meanwhile, sees a 70 percent chance of another rate hike this year.

“I’m still comfortable with one rate hike, I don’t think that’s too outlandish,” said Doug Porter, chief economist at BMO Capital Markets, noting the North American outlook was expected improve later this year as trade uncertainties lift. (Reporting by Julie Gordon in Ottawa Editing by Tom Brown)